And by smaller government we mean...

I'm trying really hard not to dismiss the Tea Party out of hand. I think it's reductionist and unfair to regard its members as simply motivated by racism (though perhaps some are) or suggest that the whole movement is part of some fell funded Republican campaign (though some of it is). That being said, I'm having a tough time buying the argument that the Tea Party really wants smaller government. Take this recent New York Times profile of recently unemployed supporters of the movement:

"When Tom Grimes lost his job as a financial consultant 15 months ago, he called his congressman, a Democrat, for help getting government health care. Then he found a new full-time occupation: Tea Party activist...

Mr. Grimes, who receives Social Security, has filled the back seat of his Mercury Grand Marquis with the literature of the movement, including Glenn Beck’s 'Arguing With Idiots' and Frederic Bastiat’s 'The Law,' which denounces public benefits as 'false philanthropy.' 'If you quit giving people that stuff, they would figure out how to do it on their own,' Mr. Grimes said...

He blames the government for his unemployment. 'Government is absolutely responsible, not because of what they did recently with the car companies, but what they’ve done since the 1980s,' he said. 'The government has allowed free trade and never set up any rules.' He and others do not see any contradictions in their arguments for smaller government even as they argue that it should do more to prevent job loss or cuts to Medicare. After a year of angry debate, emotion outweighs fact."

Obviously smaller government would have less trade restrictions and fewer retraining programs for workers. In fact, one of history's most vocal supporters of free trade is Bastiat, who is required reading for libertarians. These are not small contradictions.

Of course these are just one person's views. But polls of Tea Party supporters seem to suggest similar inconsistencies. For example, a recent Bloomberg poll found that while 90% of Tea Party supporters fret that the US is moving toward "socialism", 70% favor the federal government fostering job creation. Further, half of those polled favored government restrictions on Wall Street salaries and their views were mixed about privatizing Medicare and other federal programs.

In fact the real gripe may not be the size of government, per se, but the perceived bias in policy. A CBS News/New York Times poll found that Tea Party supporters were more likely than other Americans to feel that "President Obama is working mainly on behalf of the poor, and not the middle class."

These polls pose interesting questions about the future of the Tea Party and what its impact on policy will ultimately be. Will the movement maintain its relevance when unemployment falls below 7%? Will deficit concerns impact legislation that largely benefits the middle class? (Note, that the 2003 passage of Medicare Part D, the hugely expensive but unfunded expansion of Medicare, met with no opposition from anti-deficit campaigners.)

Personally, I think the Tea Party will fizzle as the economy improves. While Americans in general are less amenable to large government than Europeans, the views expressed by Tea Party supporters don't indicate any large ideological shift. People are angry because times are tough and they feel neglected. But that doesn't mean we're headed toward some small-government Randian utopia.

Keynes vs Hayek: the rap showdown

Russ Roberts' long awaited (by me at least) new music video is here. Roberts, an economist by trade, wrote the lyrics for a rap battle between John Maynard Keynes and F. A. Hayek on the nature of the business cycle:



Keynes and Hayek were certainly ideological opponents during their lives. Hayek was a central figure in the Austrian school of economics, whose focus on voluntary contracts between individuals and the organizing power of the price system saw little role for the government in the economy (or anywhere else). Keynes, on the other hand, argued that markets (capital markets in particular) can fail on their own; when they do, government has a crucial role to play in stabilizing the economy.

Roberts, himself an adherent of the Austrian school, is better positioned to argue Hayek's side (he blogs at "Cafe Hayek"). While Keynes' basic ideas are laid out in the video, much of the nuance is missing (as is probably to be expected in a 6 minute rap-debate on the subject). In particular, I felt Keynes' views on savings were somewhat misrepresented.

In the video, the Keynes character explains his "paradox of thrift" idea: people save money, which is good for them, but it reduces the amount that they spend, which in turns lowers other people's incomes, causing them to save more; this reduces the income of others, perpetuating the cycle. Thus an individually beneficial action (saving) has negative consequences if everyone does it.

Some take the paradox of thrift to mean that "Keynes opposed savings", but this interpretation is simply untrue. James Hamilton explains the distinction:

"...aren't I delighted that consumers are now, finally, saving more? Well, no. It is one thing to identify a higher national saving rate as the long-term goal, and quite another thing to try to get there overnight in the form of a sudden drop in consumption spending. Here I am very much taking the side of Brad DeLong ([1],[2]) and Arnold Kling and against Eugene Fama ([1], [2]) and John Cochrane. The relevant question is whether, in response to an abrupt decrease in consumption spending such as we're now experiencing, some of the other variables (most importantly, Y) might adjust in response as well. It is certainly true that in a very simple economic setting-- for example, an economy that consists of a single farm producing only one good-- the decision to save more of your income (leave some of your wheat unconsumed) is necessarily identical to the decision to invest more (save the wheat for later). And one can write down more complicated models in which economic actors and markets adjust in a way to see through the veil of production and exchange and make sure it is I + X that adjusts in response to a higher saving rate, and not Y."

Much of Keynes' theory had to do with the translation of savings into investment. The classical economic perspective was that savings, by definition, equals investment. Thus, if people save more, then they invest more, leaving GDP unchanged. But Keynes argued that when people were fearful about the future, they would hoard money (e.g. stuff money in the mattress), diverting savings from investment. This means that sudden shifts in savings (for example, in response to a financial crisis that hurts household portfolios) can result in an economic contraction. In Keynes' mind, this was where government should enter with stimulus, to counter the drop in spending and soften the blow to the economy.

Is the paradox of thrift real? Not everyone would agree, but Paul Krugman provides some compelling evidence for it.

The point here is that one of the main differences between Keynes and Hayek (indeed between Keynes and most of the economists who came before him) had to do with the nature of the savings/investment relationship. Keynes was not advocating profligate spending for the sake of spending. Rather, he postulated that markets could fail and that government could play a role in mitigating the business cycle.

That being said, I thought the video was great; it was entertaining and provides a wonderful introduction to a major debate in the history of economic thought.